No Actual Prejudice From Late Notice Where Insurer Could Not Have Altered Outcome of Claim

The Maryland Court of Appeals, applying Maryland law, has held that an insurer could not show actual prejudice from late notice because it could not have impacted the outcome of the claim.  National Union Fire Ins. Co. v. The Fund for Animals, Inc., 2017 WL 383453 (Md. Jan. 27, 2017).  Although the insured sustained adverse rulings in a related case which were then given collateral estoppel effect in the underlying case, the insurer would not have had any right to direct the defense of the related proceeding.

In the first of two underlying matters, the policyholder brought an action under the Endangered Species Act alleging mistreatment of various circus animals (the ESA Case).  While the ESA Case was pending, the ESA defendant brought a RICO Case against the insured, alleging that the policyholder bribed a witness, obstructed justice, and engaged in wire fraud during the ESA Case.  During that time, the court in the ESA Case made various adverse findings against the policyholder.  These rulings were then applied in the RICO Case under principles of collateral estoppel.  While the RICO Case was pending, the policyholder sought coverage for the RICO Case under its claims-made-and-reported policy.  The insurer denied on the grounds that notice was over two years late.  The RICO Case then settled with the insured paying $2.5 million.

In the ensuing coverage litigation, the trial court ruled for the insurer, holding that the adverse findings in the ESA Case drove up the settlement value of the RICO Case, prejudicing the insurer.  The intermediate appellate court reversed.  An Executive Summary of the intermediate appellate court’s opinion can be found here.

The Maryland Court of Appeals agreed that the insurer failed to demonstrate actual prejudice from the policyholder’s late notice.  Maryland Insurance Article § 19-110 requires the insurer to show that it was actually prejudiced in its ability to investigate, defend, or settle the underlying action.  First, the court noted that mere passage of time – here, two years – was insufficient to constitute actual prejudice.  Second, the court reasoned that even if the insurer had been given earlier notice of the RICO Case, it could not have impacted the ESA Case.  The insurer had no right to intervene in or defend the ESA Case because the insured was a plaintiff in the case and therefore the case was not covered.  Thus, the insurer’s involvement in the ESA Case was “speculative” and “dependent upon [the insured’s] consent.”  The court found evidence of prejudice lacking because there was no basis to find that earlier notice would have altered the outcome of the ESA Case, impacted the preclusive effect of the factual findings in that matter, or changed the amount for which the RICO Case would have settled.  By the time the insurer would have had notice of the ESA Case, “the direction of the ESA Case was well established and [the adverse facts were] apparent.”  Finally, the court also noted that despite the policyholder’s delay, the insurer nonetheless received notice of the RICO Case prior to its settlement and still had the opportunity to participate in that action.